Zefa For Sale?

The London Financial Times has reported that the 3i, private equity group, has selected LongAcre, a corporate finance boutique, to undertake a strategic review of the company to consider a sale.

Under the headline "Corbis and Getty set to battle for Zefa library" the article argues that these two companies are "expected to lock horns in the battle for Zefa."

In 1998 3i provided Erwin Fey, the majority and controlling shareholder of Zefa, with about $7.4 million in investment capital to grow Zefa. Zefa's sales have quadrupled since then to about $43 million in annual sales. Part of the quadrupling resulted from the acquisition of Benelux Press and some smaller companies, and 3i added additional funds at that time, but still has a minority interest.

The Financial Times article estimated that the company might be worth two-and-a-half times annual sales, or in the range of $110 million. Part of this valuation appears to be based on the recent acquisitions by JupiterMedia of Comstock and ThinkStock. However, this does not take into account that Jupiter bought wholly owned content, not licenses with photographers where the photographer receives a large royalty on each sale, as is the case with most of the Zefa content. Thus, it seems unlikely that Zefa, or any other similarly structured agency, would sell for anything near two times annual sales in today's market, and certainly not more.

As a normal process when a private equity group like 3i makes an investment of this nature they look to "substantially increase the value of (their) portfolio companies and then realize this value" in about five or six years. Erwin Fey says, "This was understood from the beginning, and six years has now passed."

Fey continued, "3i wants to determine the value of their stake and clear their investment, but no decision has been made at this time on the best way to accomplish this and nothing has been offered to anyone."

Fey believes the company is in good shape, strong in the market. He would like to continue in the business and does not plan to sell his shares. A variety of options are being explored including 3i selling its stake to other minority investors, an IPO, etc. The process of determining the best course of action is likely to take several months.

Is A Purchase By Getty Or Corbis Likely?

Clearly, from the thrust of the Financial Times article which notes Getty's $400 million in cash, 3i would like to see a bidding war like the one that took place when Getty Images acquired Visual Communications Group in early 2000. At that time Getty bid much more than Corbis was willing to offer. Most observers believe they did it more to keep VCG out of Corbis' hands rather than believing the company was worth what they paid for it.

However, there are several issues that make it highly unlikely that Getty or Corbis would make an offer for Zefa.

First, neither Getty nor Corbis would want a part ownership stake in a company they do not totally control. As long as Fey wants to continue to operate Zefa as a separate, independent organization there is nothing in the deal that is likely to interest Getty or Corbis.

Secondly, Getty already controls a substantial portion of the European market and the European Union is tougher on anti-trust issues than the U.S. government. If Getty tried to buy its major competitor the EU would likely see it as an effort to eliminate competition. Zefa is certainly number 2 if not number 1 in Germany, and is probably number 2 throughout Europe, ahead of Corbis.

Even if anti-trust were not an issue, and all of Zefa was available for sale, it is questionable as to what Getty would get by acquiring it. Getty needs to expand its customer base in Germany and other parts of Europe, but they already know who most of Zefa's customers are and are marketing heavily to those people. And yet, for some reason, those customers are buying Zefa images instead of Getty's.

Part of the reason may be that Zefa has better content for that market than Getty, but I believe a bigger reason is that the customers want a variety of photo sources to choose from and Zefa provides them with that variety, plus good customer service. German buyers also like to deal with German companies whenever possible. If Getty were to own Zefa, and totally integrate it into their existing sales and marketing operation, many Zefa customers would look hard to find options other than Getty. Granted, at that point the choices might be so slim that they would be forced to go to Getty, like it or not, but that's why the anti-trust issue is so large.

Finally, many of Zefa's most productive image suppliers have left brands now part of Getty or Corbis in order to join Zefa. They made these moves because they were dissatisfied with how they were being treated at their former agencies. An acquisition by either of these companies is likely to create the same type of photographer relations problems that both companies struggled with a couple of years ago. Both Getty and Corbis are happy to have these problems behind them and would not look forward to struggling with the same issues and people again.

All told it seems very unlikely that Getty or Corbis will take over any part of Zefa.

Jim Pickerell is founder of www.selling-stock.com, an online newsletter that publishes daily. He is also available for personal telephone consultations on pricing and other matters related to stock photography. He occasionally acts as an expert witness on matters related to stock photography. For his current curriculum vitae go to: http://www.jimpickerell.com/Curriculum-Vitae.aspx.

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